Africa’s economic fragility and vulnerability have long been a topic of concern for investors looking to invest in the continent. Despite significant strides in recent years, many African economies remain exposed to external shocks and structural issues that hinder their ability to achieve sustained and inclusive growth.
One of the primary challenges facing African economies is their overreliance on commodity exports. While the continent is rich in natural resources, the global market for these commodities is highly volatile and subject to sudden price swings that can negatively impact the economies of commodity-dependent countries. This leaves many African countries at the mercy of global market forces, rendering them vulnerable to external shocks and susceptible to economic volatility.
To address this challenge, African policy-makers must focus on promoting economic diversification. They can do this by investing in infrastructure, education and innovation to support the development of new industries and businesses. They can also work to improve trade relations and regional integration, which would allow countries to take advantage of economies of scale and boost intra-African trade. The African Continental Free Trade Area (AfCFTA), launched in 2019, provides a framework for promoting intra-African trade, and it has the potential to boost economic growth across the continent.
In addition to promoting diversification, African policy-makers must also address the root causes of conflicts and instability on the continent. Conflicts and instability can have significant negative consequences for investors, including damaging infrastructure, disrupting supply chains, and decreasing the predictability of markets. African countries can address these issues by investing in conflict prevention, promoting good governance, and improving access to education and healthcare. By doing so, they can create a more stable and predictable business environment that is more conducive to sustained economic growth and development.
Another significant challenge facing African economies is their vulnerability to external factors, such as climate change, pandemics and global economic shocks. African countries are particularly susceptible to the effects of climate change, which can lead to droughts, floods and other extreme weather events that negatively impact agriculture and other industries. Additionally, pandemics such as COVID-19 can disrupt supply chains and destabilise markets. To address these issues, African countries must invest in building more resilient and adaptable economies, including infrastructure that can withstand extreme weather events, and health systems that can respond quickly to pandemics.
More pragmatic solutions to explore
Furthermore, building adequate infrastructure is critical to economic growth in Africa. To improve road networks, governments can work with private-sector investors to develop public-private partnerships (PPPs). These partnerships can help mobilise financing for infrastructure projects while also transferring risks to the private sector. For example, Kenya’s PPP model has helped the country build new highways, airports and railway lines. Additionally, governments can also seek multilateral and bilateral support from international development institutions such as the African Development Bank (AfDB) and the World Bank.
Also, addressing corruption requires a multi-pronged approach. Governments can strengthen anti-corruption institutions, improve transparency in government operations, and promote greater accountability in public service delivery. Furthermore, policy-makers can promote the use of technology to fight corruption, such as digitising public service delivery systems and implementing e-procurement systems. In addition, investors can engage with companies to improve their anti-corruption policies and practices.
Again, supporting the growth of SMEs requires access to finance, training and technical assistance. To provide access to finance, policy-makers can establish venture capital funds or angel investor networks, or support the development of a stock market to raise capital. Governments can also provide training and technical assistance to entrepreneurs through incubation hubs and accelerator programmes. For example, the Ghanaian Government has established a National Entrepreneurship Support Programme to provide business development services to SMEs.
Another worthy point is regional integration. To promote regional integration, policy-makers can work toward removing trade barriers and promoting the free movement of goods and people. This can be achieved through the establishment of regional trade agreements and economic blocs, such as the African Continental Free Trade Area (AfCFTA). Investors can also look for opportunities to invest in companies that are well-positioned to take advantage of regional integration and the benefits of scale.
Governments can equally promote policies that encourage investment in the digital economy to leverage digital technology. This includes the development of regulations that support the growth of digital platforms and e-commerce as well as the expansion of digital infrastructure. Investors can support the development of the digital economy by investing in companies that are active in this sector, including digital platform companies, e-commerce firms and Fintech start-ups.
In addition to promoting diversification, Africa’s policy-makers can work to improve access to higher education. Developing a skilled workforce is critical for economic growth in Africa, and can empower the continent’s youths through better job opportunities and higher wages. This can benefit investors by helping them access talent from the continent, which gives them greater access to markets in Africa. To grow the number of students pursuing higher education, African governments should make this opportunity more accessible and affordable by increasing government spending on education and promoting the development of online learning platforms.
Costly government regulation also burdens companies operating in Africa. This can constrain business activity and discourage investment, which ultimately limits Africa’s growth potential. To reduce regulatory costs, policy-makers can review and repeal unnecessary regulations, and simplify existing regulations to encourage trade and investment. For example, Ghana has adopted a new set of policies to make the business environment more competitive. These reforms include the deregulation of its electricity market, which has allowed companies to better access and manage power services.
Policy-makers must also make sure that African businesses are prepared for the increasingly competitive global marketplace. To ensure this, they can promote policies that encourage economic integration and regional integration across the continent. Policies that encourage intra-African trade and investment could boost Africa’s competitiveness in global markets amid the ongoing economic uncertainty despite trade protectionist measures taken by some nations in response to increased foreign competition. E.g., The African Continental Free Trade Area (AfCFTA) provides a promising framework for promoting intra-African trade, which is critical for sustained economic development across the continent.
Currently, special economic zones are emerging as catalysts for spurring growth in the continent. They are becoming a popular tool for governments in Africa to drive development and stimulate economic activity. As a part of the African Union’s Agenda 2063, these zones provide an opportunity for governments to harness their potential to drive growth by encouraging foreign direct investment (FDI), boosting economic diversification, and promoting greater regional integration. In addition, these SEZs are expected to create a conducive business environment for investors by offering incentives and cheaper land prices.
Investors can benefit from this by building production facilities in these zones, which will boost their supply chains on the African continent. E.g., Ghana’s Dawa Industrial Zone is a one-stop shop for investors looking to establish manufacturing facilities in Ghana. It offers various incentives, including tax holidays, duty-free importation of capital goods, and a 100 percent exemption on import duties and taxes on raw materials. The Dawa Industrial Zone also provides excellent infrastructure, including reliable power supply, water and telecommunication services. This makes it an attractive destination for investors looking to set up production facilities in Ghana and strengthen their supply chains in the West African region.
Investors can also benefit from Africa’s growing consumer base. This represents a huge opportunity for companies and investors to tap into Africa’s ever-growing consumer market, driven by rapid urbanisation and rising incomes. This growth presents investors in industries ranging from telecoms to retail, with a chance to expand into newer markets and develop new customer bases across the continent.
Seizing these opportunities to reduce barriers to economic growth and tackle Africa’s development challenges will help the continent overcome its lack of progress relative to other regions. Investors can deploy their capital by partnering with African companies that are poised to benefit from the opportunities identified above, including through investments in sectors, such as technology, infrastructure, manufacturing and education. These investments could increase their access to Africa’s markets and create new business opportunities for the continent’s economies.
Finally, African governments can encourage stakeholders to develop more effective and transparent public service delivery systems in order to reduce corruption. This requires a multi-pronged approach, including the reform of government procurement policies, increasing transparency in government operations, and improving the accountability of public officials. Technology can also be used to tackle corruption. For example, the deployment of smart technologies can increase transparency and accountability in government operations by improving the tracking of government resources and reducing opportunities for graft. African countries have the potential to become developed economies, but they must address their economic vulnerabilities and inefficiencies if they are to achieve sustainable and inclusive growth. By promoting economic diversification, increasing intra-African trade, addressing conflicts and instability, investing in conflict prevention, committing to good governance, improving access to education and healthcare, investing in infrastructure, and building more resilient economies through the development of institutions that can respond quickly to external shocks and climate change, Africa can become a more stable and prosperous region.
The writer is an award-winning financial advisory, trade and transformation consulting professional with almost two decades of enterprise leadership experience across EMEA.
